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Does economic policy uncertainty impact global value chain participation of Indian firms? The role of financial constraints

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  • Reddy, Ketan
  • Sasidharan, Subash
  • Thangavelu, Shandre Mugan

Abstract

This study investigates the impact of economic policy uncertainty (EPU) on global value chain (GVC) participation of Indian manufacturing firms. Using firm-level panel data from India spanning 2004–2021, we estimate a probit model and address endogeneity concerns using an instrumental variable approach. Our analysis reveals that higher economic policy uncertainty leads to a decline in firms' GVC participation. The adverse effects of EPU translate via the financial constraints channel with high-leverage and low-liquidity firms experiencing a greater impact of EPU on their GVC integration. Moreover, we find that firms with access to trade credit can mitigate the adverse impact of EPU. In addition, using survival analysis, we also demonstrate that higher EPU is associated with greater exit rates among GVC firms.

Suggested Citation

  • Reddy, Ketan & Sasidharan, Subash & Thangavelu, Shandre Mugan, 2025. "Does economic policy uncertainty impact global value chain participation of Indian firms? The role of financial constraints," Economic Modelling, Elsevier, vol. 152(C).
    • Handle: RePEc:eee:ecmode:v:152:y:2025:i:c:s026499932500238x
    DOI: 10.1016/j.econmod.2025.107243
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    Keywords

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    JEL classification:

    • F1 - International Economics - - Trade
    • F14 - International Economics - - Trade - - - Empirical Studies of Trade
    • L2 - Industrial Organization - - Firm Objectives, Organization, and Behavior

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